Tough new policies on immigration have cast a cloud over the US technology sector, a big contributor to economic growth in 2016. Mr Trump has backtracked on green cards. However, his restrictions could undermine the strong rise in R&D spending, which hit a record high in Friday’s GDP report.
Mr Trump’s hard-line on trade is also creating ripples. Nevertheless, it is important not to lose sight of the long-term goal: faster job creation in the US. Fewer high-skilled migrants in the technology sector will need to be counterbalanced by the broader impact of reshoring, the boost to construction from infrastructure projects and a potential acceleration in bank lending.
Junk bonds appear overpriced after last year’s rally. Corporate bonds outstanding have continued to rise relative to GDP. However, companies have been accumulating valuable assets on their balance sheets in intellectual property and other intangibles. High yield bonds may continue to outperform, alongside equities.
Indeed, the stock market rally in the face of protectionist rhetoric is striking. The details of Friday’s GDP report were encouraging and business surveys point to a strong Q1. Technology shares may underperform in the short run but, on balance, Mr Trump’s populism will deliver a boost to economic growth and equity valuations in 2017. Treasury yields will hit new highs. The surge in the Kansas Fed manufacturing index for January points to a rise in the ISM this month, which will put further upward pressure on yields.
Summary
- Populist policies should push non-residential investment to new highs
- Intel’s record capex plans for 2017 underline pace of tech innovation
- High yield may continue to outperform as equities rally
To download the PDF of the commentary, click here
